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In recent years
Sears Holdingsshld 5.2805280528052805%Sears Holdings Corp.U.S.: NasdaqUSD12.76
0.645.2805280528052805%
/Date(1481234400125-0600)/
Volume (Delayed 15m)
:
2448253AFTER HOURSUSD12.7
-0.0600000000000005-0.4702194357366771%
Volume (Delayed 15m)
:
1214
P/E Ratio
N/AMarket Cap
1295906705.59811
Dividend Yield
N/ARev. per Employee
135449More quote details and news »shldinYour ValueYour ChangeShort position
has been among the more controversial companies on Wall Street. Yet there is little disagreement between the stock's backers and detractors about the quality of the core Sears and Kmart retail operations: All think it stinks. Both chains are considered also-rans, with too many tired stores in disadvantaged locations, subject to a slow bleed in sales.

Move beyond an assessment of Sears Holdings' retail operations, however, and the debate gets sharper. Bears on the stock, many responsible for a large and enduring short position that now amounts to about a quarter of the publicly traded shares, believe the sales erosion, coupled with a big slug of debt and a hefty pension obligation, will make it hard for Sears to avoid a bankruptcy filing or some other equity-decimating restructuring. But a growing bullish contingent focuses on the value of Sears' disparate assets, including its respected Kenmore and Craftsman brands, and its owned and leased real-estate holdings, which could be turned into cash.

Most of all, Sears' Wall Street fans believe Chairman Edward Lampert—the hedge-fund manager and retail impresario who put Kmart and Sears together in 2005, and who controls 62% through various entities—has structured the company to allow the full value of its assets to be realized, and is motivated to make that happen through some sort of financial engineering or restructuring within the next two years. Sears shares (ticker: SHLD) currently change hands around $51, a lot nearer their January low of $29.20 than their 2007 high of $190. If Lampert succeeds in restructuring the company, the stock could be worth close to $100.

Sears Holdings / SHLD

Recent Price

$50.67

12-Month Change

-14.2%

Revenue F2013E(bil)

$38

Loss Per Share F2013E

-$3.35

Loss Per Share F2014E

-$2.57

Net Debt (bil)

$2.5

Fiscal year ends in January E=Estimate

Source: Thomson Reuters

Barron's has followed Sears closely since Lampert became involved, and turned bearish on the stock in a 2009 cover story ("Washed Out," Aug. 24, 2009). Now it is time for a reappraisal.

Last December Sears preannounced a dreadful holiday season, prompting credit-rating agencies to downgrade its debt several notches, putting it well into "junk" territory. The company eventually booked a fiscal fourth-quarter loss of $2.4 billion, or $22.63 a share, equal to 30% of its current enterprise value of $8 billion, composed of $5.5 billion of market value and about $2.5 billion of net debt. Nearly all the loss reflected non-cash impairment charges, merely confirming the market's dim view.

In another welcome move, the company's tight-lipped management has become more open about operating results, balance-sheet issues, and restructuring plans. The enhanced disclosure, via conference calls and regulatory filings, suggests Sears finally might have found a way to reward its long-suffering holders.

For a company that spent decades as a Dow industrials component and still has $40 billion in annual sales, Sears draws scant coverage from Wall Street analysts, owing in part to Lampert's controlling position. Gary Balter, an analyst at Credit Suisse, has penciled in about $700 million in earnings before interest, taxes, depreciation, and amortization for the current fiscal year, which ends next January. He rates the stock Underperform, with a price target of $20.

BASED ON AN ENTERPRISE value-to-Ebitda ratio of 11, Sears is hardly cheap. An underfunded pension plan that will require some $400 million a year in contributions, even under recently passed congressional relief, gives investors further reason to stay away.

Sears' valuation hardly matters, however, when fashioning a sum-of-the-parts calculation. Previously, this theoretical exercise served to highlight investors' margin of safety. Now it is far more relevant, given what Balter and others call Lampert's slow-motion liquidation of the company.

Sears Holdings' structure as a holding company lends itself to this sort of dissolution. The parent owns equity stakes in several divisions, some hamstrung and others valuable. The largest includes 2,200 domestic full-line Sears and Kmart stores, and will be shrunk through store closures and the sale of buildings and leases. The remaining units will be revamped to play up Sears' lingering strengths in tools and appliances.

According to several media reports in recent months, Sears is open to the idea of selling Lands' End, an online and catalog retailer of all- American apparel. The company bought it in 2002 for $1.8 billion, and estimates of its value range between $1.5 billion and $2 billion, based in part on the 2011 sale value of J. Crew, a similar but more upscale brand.

The Bottom Line

Sears could be worth $100 a share if the company sold much of its real estate, shrunk its store base and exploited its tool and appliance brands

Nearly half of Sears Canada will be spun off this year. The unit is sitting on valuable real estate that could be attractive to competitors entering the Canadian market.

Sears Hometown, a network of 1,000 smaller-format franchised stores focusing on appliances and hardware, is due to be spun off in the next couple of months through a $400 million rights offering fully backed by ESL, Lampert's investment vehicle. The Hometown stores, mostly in smaller communities, provide an attractive new distribution platform for Sears' Kenmore, Craftsman, and DieHard brands.

Lampert has walled off these brands in a limited partnership called KCD, which some consider the company's crown jewel. They are largely exclusive to Sears, but efforts are under way to distribute them more widely. Despite Sears' retailing woes, Kenmore remained the leading appliance brand in the U.S. in the fourth quarter; it controls about 18% of the market.

LAMPERT HAS TAKEN CARE TO separate Sears into "guarantor" and "non-guarantor" subsidiaries, with the former securing the company's $1.2 billion in senior notes due 2018. Importantly, KCD and a unit housing 125 properties leased to Sears aren't guarantors. The division signals where most of the value resides in the company.

Cliff Orr, an analyst at Privet Fund, a hedge fund in Atlanta focusing on special situations, notes that loan documents indicate that KCD and other non-guarantor subs generate more than $600 million in free cash flow annually. Using conservative industry multiples to value their profit stream would suggest they are worth more than Sears Holdings' current value.

Orr also sees substantial unappreciated value in Sears' real estate. Many buildings are decades old and carried at antiquated valuations on its books. Moreover, many Sears stores in malls have long-term leases far below market rates, which could tempt landlords to buy them out and repurpose the space. Orr thinks the risk-reward trade-off is compelling for Sears shareholders up to at least $100 a share, even without more clarity on future asset spins or sales.

There has long been an element of Kremlinology attached to deciphering Lampert's plans and endgame. But there is also a measure of comfort in knowing that Sears survived the greatest housing and real-estate bust in generations, and that its chairman has increased his personal stake to 22% from 17% since December, while shrewdly ensuring the company has access to ample liquidity. Before he's done, Lampert just might engineer one of the more epic short squeezes in memory.